Here’s What Happened to My Call for $150 Oil

by | published June 20th, 2012

[Editor's Note: Kent released the following report to his Energy Advantage subscribers just a few hours ago… But many of your fellow readers here have asked a similar question about the current situation in the energy markets. We wanted to make sure that all of Kent's readers have a chance to see it today. Cheers, James.]

I've received several questions like the one below. It's an important one…

Q: Kent, you have predicted $125/barrel oil in July… and we cannot even get to $90!!! But you have not addressed anywhere this BIG miss, nor have you provided adequate explanations for it, nor where the real bottom is. (Some forecast $65-$75, and that we could stay in the $60-$90 range until year-end.) It seems to me you gotta take the hit and update on the situation… You are supposed to be the energy expert. Thanks! ~ Adrian

A: Adrian, I agree. It's time for a good, hard look at why the oil situation has not unfolded the way I anticipated, and for an assessment of what's happened and the market's new dynamics -including where we stand now and where I believe we're headed next.

Clearly, we're no longer going to see $125 oil by July 1st. Not anymore. (Actually, I had predicted an even higher price – $150 a barrel and possibly, under the right set of circumstances, $200.)

So what happened?

When I made the projection this spring, all the factors were in line for a massive spike in crude oil prices. The strange thing is, most of these factors are still in line.

There are nine indicators I review every day to determine where the price of oil is likely to be.
All nine were pointing in the same direction (up) by March 16, and six are still pointing in the same direction today. But markets have a mind of their own, and the last two months were simply a bear when it came to the energy sector.

There were no fundamental reasons why the slide has lasted as long as it has. A short-term pullback had been in the cards for early May, but I had that bottoming out at an 8% to 9% correction – nowhere near the upwards to 20% we actually got.

Currently, we have a floor that's formed over the past week. And that's a good thing. The longer we can see stability, the better the fundamentals are able to take hold.

Oil itself, however, is still in the grasp of forces that have less to do with the actual dynamics of the oil market and more to do with market emotion (you know, for each dose of “irrational exuberance,” there is an equal measure of “irrational pessimism”). So we will see a recovery in our energy stocks first, before we see another rise in oil prices.

The combination of severe concerns over the European mess, the flight to the U.S. dollar (that singlehandedly depresses oil prices), the unusual situation in the bond market… They have all contributed to the decline. Mega-trading programs have also moved heavy play into shorting crude oil.

These have been translated into projections of sluggish demand for crude and oil products, and that has added more fuel to the fire.

Projected demand, of course, requires upwards of a quarter's worth of figures. It's not a day-to-day exercise in extrapolating hunches from volume in storage at Cushing, Okla., or stockpiles at refineries. The first is a function of transit, not demand. The second is actually improving refinery stock values, since the stockpiles are a result of buying cheaper crude in anticipation of more expensive crude coming down the line.

The curious thing is this: Surpluses at Cushing and stockpiles at refineries were higher when we were pushing $110 a barrel in New York and $125 in London.

Markets do this. The indicators are all there, but trading decides to move in another direction. Trading exchanges may be among of the most intriguing inventions every devised, but – most unfortunately – they are not always rational.

But there's nothing we can do about that. So where are we now?

Despite all of the negative commentary on oil prices, we know three things with absolute certainty:

  • First, both OPEC and the International Energy Agency (IEA) in Paris have reported that international demand (the real driving force of where crude prices ought to be) will be coming in higher this year than the last five.

    Yes, they have been cutting estimates, but the bottom line is still a recent record.

  • Second, the last round of talks between Iran and the six major nations will break up today in Moscow. Nothing has been accomplished, and the EU embargo of Iranian oil will begin on July 1. That fact would have already moved Brent prices higher, had it not been for the ongoing drama on the Continent.
  • Third, the euro is now slowly moving back up in value against the dollar. Why? Greece will have a government by this afternoon, Spanish 10 year bond yields are now below 7% (still unsustainable, but better; the more serious problem are the yields on the shorter end of the curve), word is the European Council (the EU heads of state) will sign on to new bailout measures when they meet the end of the month, and continental-wide financial integration is approaching.

Now, Europe will remain just this side of a basket case for some time. But the odds of the 27 EU members returning to local currencies are quite low. Everybody recognizes that the demise of a common currency is a bad idea for everybody (even the strongest of the members, Germany).

What is needed now is liquidity, and that will require longer-term European bonds (whether Berlin and Paris like it or not).

All of this affects the price of crude oil (and other commodities) as futures traders play the spreads to make money. It just happens that, now, it is easier to push oil down than up.
But remember…

Our Energy Advantage Portfolio is not a month-by-month proposition. It's designed to take advantage of the most powerful long-term wealth-generating sector in the market.

Of course, when downward trends are aggravated, we will sell shares when they reach their trailing stops – a time-tested sell discipline that will preserve our capital over the long run.
But when the upward trend resumes, our shares will accelerate faster than the market as a whole.

Much faster.



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  1. June 22nd, 2012 at 15:01 | #1

    Dear Kent, June 22, 2012

    I realize the futility of assigning blame to anyone who tries to make an educated and fully unemotional, but totally risky recommendation in this market, especially in the energy sector.

    Although I made a little, I most assuredly lost a lot of moola on my decision to follow your thoughts and the direction you anticipated for the price of our 100 plus year lust and need for oil and gas.

    Timing is everything in this “Got to Have” sector and with all the ultra nervous investors pulling their money from the energy market,it’s easy to see why the price per barrel of oil fell, instead of Bull-ying its way higher.

    Now, with all of that being said, let’s get back to what is ABOUT to take place. (Kent, respond if you wish in one of you’re news letters)

    There are way to many possible but real events that are about to happen in this World, the energy sector, especially oil and gas.

    1- With Israel ready and waiting to blow up the first sign of any nuclear production in Iran
    2-With the EU withdrawing from its normal quota of oil from Iran beginning July 1, 2012
    3- With the very real threat of an Iranian blockade of the Straits of Hormuz
    4-And the resulting real possibility of a violent reaction by our Western superpowers, who have demonstrated already in the past decade, their willingness to go to war over oil
    5-With Saudi Arabia and Iran being being bitter religious enemies, plus add into that mix the thousand of miles of unprotectable oil pipelines(on both sides) waiting for a terrorist’s bomb

    I can positively say, that without a doubt, something Big, Bad and Evil, is about to take place shortly after the first day of July, 2012.

    My final sentiment on this matter is that: the price of oil is Going to skyrocket into the neverworld, and your guesstimate of $150 a barrel or more could quite likely be $ 225 p/b IF not more. I do not wish, for one second, for this to come to pass, because I also need oil and gas to meet my family’s daily needs, especially come winter; and the sounds of the petrol meter whizzing around in the gas pump, well frankly, scares the hell out of my bank account and my family budget.

    Therefore, I may make a tidy sum if any or all of this takes place, but I will not sob in my milk if I lose out on this one, because if I win, then someone(s), somewhere will have to die before this dire situation gets any better.

    William Kirkey

  2. Dr. Knud Pedersen
    June 22nd, 2012 at 22:39 | #2

    In general I agree with your analyses, however, I am not surprised at what happened. Only hindsight can predict the market 100%. Just look at silver. I follow your recommendations, and will continue to do so.
    On the other hand I do not think that the fossil fuels should even be considered, except for the very immediate future. There is no doubt in my mind that their use is destroying the planet. Only nuclear energy should be considered sustainable, and its use for all stationary power should be a national priority. Another Manhattan Project?

  3. Dominick Sciola
    June 24th, 2012 at 20:16 | #3


    Like the analysis of the current state of the oil market, especially focusing on the long-term and not short-term trading / market issues.

    If you can, please explain your ‘9 indicators’ you mentioned above, especially the 6 that still point towards higher oil prices. This I think will help your readers gain a clearer idea of where oil prices are going.

    Also, have to question your analysis on Europe and overall oil demand. If Europe does continue down the path of recession and even drags us down with them, that will inevitably lead to lower oil demand and lower prices. Perhaps the market is betting on that trajectory? Don’t know, would love your thoughts. Hopefully, July 1 will provide a spark, but then again the markets may have already priced in that embargo…

    Anecdotally, I perosnally dont see the Euro crisis being a liquidity issue, but actually a solvency issue, much like our recent cr. crisis that is still lingering in the US. A link to the IEA / OPEC forecast / reasoning would be appreciated as well IMO.

  4. Barry Keenan
    June 29th, 2012 at 01:20 | #4


    Thanks for all the great insight.

    With Europe in a prolonged mess … and the ‘developing’ world consuming more crude … China’s growth slowing down …. and America increasingly taking oil from Canada ….

    What are your thoughts on buying shares in blue chip energy companies in other countries — the so called emerging markets ??

    I’m thinking companies such as PTT and refinery TOP in Thailand (which also have over 5% dividend yields) or Medco Energy, Indonesia’s largest publicly traded oil company ??

    Many of these companies have little competition. Do they make sense as ‘buy-and-hold’ plays ??

    I’m a big fan of yours – so what are thoughts about trading outside of Wall Street ??

  5. Eric
    July 6th, 2012 at 21:13 | #5

    What about inflation hedging Kent? I read your book last year and as an employee in the oil sector (design/build of API storage tanks), I took note of the slowdown in orders in Canada even Pre-Keystone pipeline rejection and I observed from reading your book, the gaping hole that you call “Vega” is in my view nothing more than the consequences of persistent Inflation Hedging by the likes of BP and Goldman Sachs as Chris Cook has mentioned!

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